Flickr couldn’t have asked for a better Christmas gift. Starved of affection, uninvited to the social media party and left behind by more fashionable rivals, Flickr has been in desperate need of a reason to celebrate for a long time. That its gift should have come from Instagram, the hippest of those rivals and owned by social media giant Facebook, will make the unwrapping even sweeter. And it couldn’t have come at a better moment.

Flickr, which was once the darling of photography enthusiasts looking to share images and win applause from other photographers, had done little but fall off the radar since its purchase by Yahoo in 2005. It’s been out-paced by Facebook which has become the repository of the party photos and social snaps that were once the mainstay of Flickr’s casual users. It’s been mismanaged by Yahoo, which saw Flickr’s store of images as an asset to be incorporated into the company’s content bank rather than a service that should foster innovation and build communities. (Gizmodo’s account of Yahoo’s gutting of Flickr makes for some pretty harrowing reading.) And worse, it was left completely flat-footed in the mobile revolution. Its featureless app failed to break into Apple’s top 50 free photography apps and was even ranked lower than a program that added laser eyes to photos of cats.

The lack of innovation on the website has left room for 500px to steal its members while the difficulties involved in shooting on the move, editing the image and uploading it to a Flickr account from a smartphone allowed Instagram to move in and gather 100 million users who should have been Flickr’s lifeblood and would have added $1 billion to Yahoo’s valuation. News that Marissa Meyer had taken control of Yahoo led one Flickr fan to call for the former Google executive to make Flickr awesome again.

Flickr’s Slow Return

And slowly it was beginning to happen. Stephen Shankland of CNet, described earlier this month how improvements in the site’s display of large images and in the way it serves screens of contacts’ photos had persuaded him to keep his collection of 11,543 images on the site. There was still a lot to do, he said (and handily offered a long list of improvements he’d liked to see) but it looked like Flickr was moving in the right direction at last.

Those display enhancements have been followed by a revamped iPhone app. On December 12th, Flickr announced the release of a new iOS app that contains a bunch of useful features including instant updates, group management and, of course, the sort of colorful filters that can be applied across images and which make bad photography look like vaguely interesting photography. An Android app is in the works but with around 60,000 iPhone images uploaded to the site each day, Flickr focused first on the smartphone camera most popular with its users. Stephen Shankland gave it an enthusiastic thumbs up.

Flickr then has been making all the right moves but you can’t help but wonder whether it isn’t making those moves too late. Flickr, says Shankland, has a remarkable 85 million daily users, but that’s significantly fewer than the 100 million daily users of the much younger Instagram — and while Instagram has the backing of a super-strong Facebook, Flickr is dependent on an ailing Yahoo.

Instagram Only Says It Wants to Sell Your Pictures

And then Instagram stumbled. First, it ended its agreement with Twitter that enabled shots taken with the app to display properly on the microblog site. That might have been uncomfortable for users but it was at least understandable from the point of view of developing the service. It’s clearly in Instagram’s — and Facebook’s — interest for Instagram to develop its currently minimal Web presence, and that means not sending its users to a rival.

But this week, it dropped a giant of a clanger. The company published a new terms of service that suggested it wanted to sell its members’ photos to advertising firms. Users would receive no notification, no compensation and the only way to opt out was to leave the site by January 16th, 2013.

The response from users was immediate, savage — and hugely beneficial to Flickr. Gareth Copley, a Getty sports photographer and avid Twitter and Instagram user, provided a response that was typical of professionals who didn’t want to see their images sold by a company that didn’t want to ask them or compensate them for their effort:

Goodbye Instagram, it was fun while it lasted then you had to spoil it. Hello flickr http://flic.kr/ps/2otFJu

Now I can do pix with cheesy filters via Flickr perhaps I don’t need Instagram? http://flic.kr/p/dBZ1QH

Within minutes of the story breaking, Flickr, which had said nothing, was a trending topic on Twitter.

It’s no surprise then, that Instagram has since back-pedaled. The next day, the company published a blog post in which it stated that was all a misunderstanding. Instagram has no intention of selling users’ images, co-founder Kevin Systrom argued. It only wanted to place ads on the site.

Our intention in updating the terms was to communicate that we’d like to experiment with innovative advertising that feels appropriate on Instagram. Instead it was interpreted by many that we were going to sell your photos to others without any compensation. This is not true and it is our mistake that this language is confusing.

A mistake does seem to be the likeliest explanation. The absence of model releases and the presence of logos in the images would have made Instagram’s pictures a tough sale for commercial use, and if Instagram did want to turn itself into a kind of filtered iStock there are much better business models to copy than an automatic opt-in and zero compensation for creators.

The question is just how much damage Instagram’s clunky legal writing has done to its growth. The company hasn’t revealed how many members deleted their images and signed off when the new terms were released. Flickr, too, hasn’t said how much extra traffic it received. But there’s no question that trust has been damaged. Even if Instagram didn’t intend to sell its users images, the service will, for some time at least, be associated with an attempt to make money from its users’ work. As if to show just how much trust has been damaged, National Geographic blacked out its Instagram feed and declared that it would no longer post pictures if the terms remain as presented — a move that came after Systrom published his blog post.

Flickr, which would have been struggling to rustle up interest in its new app, can enjoy its Christmas present and look forward to a very happy new year.